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LITRG recognises the potential benefits of tax devolution to Scotland but cautions that setting rates and thresholds of a devolved income tax must include consideration of welfare benefits interactions.

Introduction

The Low Incomes Tax Reform Group (LITRG) has submitted comments to the Smith Commission, the body set up by the Government to consider devolution of further powers to the Scottish Parliament, and to the Scottish Parliament’s Finance Committee. The group’s main concern is over the interplay between tax powers and welfare, but it has also made a number of other key recommendations. These include consideration of equalisation payments in the UK; adherence to the principles of certainty, efficiency, stability, simplicity and consultation in devolution design; development of an effective communications strategy to reduce uncertainty among taxpayers and a consideration of devolved tax models used in federal states such as Germany and Canada.

Devolution of deductions, allowances and reliefs: increased administrative burden all round

Income tax is already being partly devolved by way of the Scottish Rate of Income Tax (SRIT). From April 2016 earned and rental income in Scotland will be subject to a devolved tax (SRIT) and a reduced rate of UK income tax. If powers to alter deductions, allowances and reliefs were devolved as well, this would significantly increase the burden on employers and the tax authorities resulting in many more individuals having to file tax returns.

Interaction between income tax and welfare: unintended consequences

If income tax powers are devolved, but powers over welfare benefits and tax credits are reserved, changes in income tax rates could have unintended consequences. Low income individuals may not benefit greatly from reductions in income tax because means-tested benefits are based on net income.

Among the benefits being considered for devolution is housing benefit. As this is encompassed by Universal Credit it is likely that it would be extremely difficult to unpick for the sake of transferring it to Revenue Scotland. Attendance allowance is another area likely to result in increased complexity; devolution would require a significant effort to communicate with the elderly and the vulnerable in order to ensure that payments continued seamlessly.

Conclusion: further complexity

Piecemeal devolution will further compound the complexity of the UK welfare system, and it is vulnerable low income individuals who will bear the brunt of this complexity. Revenue Scotland, which will operate two devolved taxes from April 2015, will need time to establish itself. Devolution must be grounded in the principle of producing as simple a tax system as possible for those using it.

Useful links

LITRG response to the Smith Commission
Further information on the Smith Commission
LITRG response to the call for evidence issued by the Finance Committee of the Scottish Parliament